The PE industry is, therefore, hopeful that with the new government in place, Budget 2014 will introduce proposals that usher in an era of certainty for the investing community.

Tax uncertainty continues to be a major cause of concern for PE players in India and can be considered as one of the key reasons for deal activity in India to have ebbed over the last couple of years.

In its election manifesto, BJP had stated: "The UPA government has unleashed 'tax terrorism' and 'uncertainty', which not only creates anxiety amongst the business class and negatively impacts the investment climate, but also dents the image of the country."

The PE industry is, therefore, hopeful that with the new government in place, Budget 2014 will introduce proposals that usher in an era of certainty for the investing community.

#budgetbt TweetsThe major issues of concern for the PE industry are centred around retrospective taxation of indirect transfers, introduction of GAAR, treaty availability and characterisation of income.

Retrospective taxation has, indeed, scared away investors from India. As a principle, retrospective application of tax law should occur only in exceptional cases and should not be applied to "expand" the tax base. In fact, in several countries such as Brazil, Greece, Mexico, Mozambique, Paraguay, Peru, Venezuela, Romania, Russia, Slovenia and Sweden, there is a constitutional or statutory protection against retrospective taxation. Introduction of offshore transfer taxation with retrospective effect has marred India's image and reversing the same would surely send positive signals in international markets.

Second, the provisions related to indirect transfer are currently very broadly worded to cover even taxation of gains arising to investors in offshore PE funds on account of redemption of their investments in the pooling vehicle or inter se transfer amongst such investors. Investors in PE funds need to be specifically exempted from the coverage of taxation of indirect transfer.

As regards GAAR, the concern is that the provisions are too broad-based and bestow far-reaching powers in the hands of tax authorities which could be misused. GAAR is an extremely advanced instrument of tax administration and intensive training of tax officers specialising in the finer aspects of international taxation is a prerequisite. There is a certain level of preparedness required for introduction of GAAR and the general impression seems to be that the Indian tax administration is not yet ready for it. While GAAR is good to have, and is in line with how the international tax policies are evolving, it may be prudent for India to defer the same for a few years.

Further, all investments made, and the existing ones as on the date of commencement of the GAAR provisions, should be grandfathered so that on their exit on or after this date, GAAR provisions are not invoked.

There are other issues around which immediate clarity is required, such as long-term capital gains tax rate in the case of unlisted private limited companies, i.e., 20 per cent versus 10 per cent, the fate of Cyprus treaty, etc. Also, abolishing buy back tax could give a boost to deal activity in India.

From a domestic fund regime perspective, it would be useful to provide tax pass thru status to all registered funds, i.e., all AIFs instead of restricting it to only Cat I AIFs. Last, there needs to be certainty as regards to characterisation of income for PE funds and a clear provision in this respect would be useful.

It would also help if the government clarifies its position on the Direct Taxes Code since some of the concepts that were proposed to be introduced therein, such as place of effective management, controlled foreign corporation, etc., would have far-reaching implications on PE industry. There needs to be a clear statement on whether the Direct Taxes Code is going to be shelved or introduced in a new form or same form, with indicative timelines.

Last, the fund managers amongst the Indian diaspora would be enthused if India were to introduce an offshore fund manager regime, i.e., a separate tax scheme under which fund managers can be encouraged to be based in India. This would entail exempting offshore funds from taxation in India, even if their funds are managed from India, and also providing an attractive tax regime for the fund managers. The benefits this would bring in for the Indian economy at large would far outweigh the potential loss of tax involved.

The world is watching India, and the announcements the FM makes on July 10 will send out a signal to the world on whether India means business - is it going to be "red carpet or red tape"? PE players are upbeat and are looking forward to good times ahead.Punit Shah is Co Head of Tax, KPMG in India, and Sheetal Nagle is Director, KPMG in India